A life annuity is a sale of real estate coupled with a risk that depends on the lifespan of the annuitant (seller or third party).
(the vendor or a third party). The price of a life annuity sale is made up of a life annuity paid periodically and, where applicable, a bouquet, consisting of a cash payment of a certain amount.
The amounts of the bouquet and the life annuity are freely determined by the parties, just like any other sale.
Calculating the life annuity: determining the market value
Before calculating the life annuity and the bouquet, it is first necessary to assess the market value of the property, i.e. the price at which the house or flat could be sold within a reasonable timeframe given the market.
To arrive at a consistent figure, you need to know whether the property is a free life annuity (a property that is not occupied by anyone) or an occupied life annuity.
To determine the market value of an occupied property, you will need to take into account any rights of use and habitation, or even usufruct, that the vendor may reserve for himself. These rights reduce the market value of the property. This is known as an occupancy allowance.
It should be noted here that a right of use and habitation will result in a smaller discount than a usufruct.
Unlike usufruct, the seller who reserves a right of use and habitation for himself (or for a third party) does not have a real right but a personal right. They will not be able to rent out the property, mortgage it or sell their rights, although this is possible for a life annuity vendor who reserves the usufruct.
It should be noted that the majority of occupied life annuity sales are made with a reservation of the right to use and live in the property in favour of the vendor. The reservation of usufruct should be avoided, particularly in view of the constraints that may be imposed on the debtor. This is the case if
the creditor has granted a tenancy, which will be enforceable against the life annuity purchaser after the seller's death.
In order to determine the market value of the property sold as a life annuity, a greater or lesser discount must therefore be applied if the vendor reserves a right of use and habitation or usufruct. Although it is possible to refer to a tax scale to apply a discount, this technique is not very relevant.
technique is not very relevant.
It would be more appropriate to deduct from the market value the rental value of the property over a period corresponding to the seller's life expectancy.
Calculating the life annuity: determining the bouquet
The life annuity and the final payment will be determined from the market value. These must remain correlated so that the sale price actually paid by the purchaser is equivalent to the market value of the property in the event that the vendor dies in accordance with his or her life expectancy.
As in the case of an ordinary sale, the vendor could sell at a price lower than the market price, but the tax authorities would retain the right to retain the market value for the purposes of their registration duties if they considered the price to be lower than this value.
If the vendor dies prematurely or well beyond his life expectancy, the sale will be a good deal for the purchaser in the first case or for the vendor in the second. This is an exception to French law, which states that a contract can only be valid if there is agreement on a price and a thing. In this case, the sale price cannot be determined precisely at the time of the contract.
Once the property for sale has been valued, the amount of the life annuity will depend on the amount of the bouquet paid by the purchaser at the time of the deed of sale. The amount of the deposit will depend on the seller's short-term plans. If the life annuity vendor has no particular short-term needs, he or she may prefer a more comfortable annuity and will not require a bouquet, or will require it to a lesser extent.
In general, the bouquet is 20% to 30% of the value of the property.
Determining the amount of the life annuity
Once you have assessed the property for sale in relation to the market and the short-term needs of the life annuity vendor, the next step is to calculate the amount of the life annuity. While contractual freedom is the rule throughout all these stages, there is always one exception to this principle. The amount of the life annuity may not be less than or equal to the income that can be generated by the property that is the subject of the sale. If this were the case, the life annuity sale would be null and void for lack of a real and serious price.
Calculation of the life annuity must take account of the life expectancy of the vendor or vendors, in accordance with scales.
Life annuity indexation clause
Life annuities are often used for maintenance purposes, so the amount should be indexed to reflect the cost of living. The choice of index remains virtually unrestricted (for example, the monthly consumer price index for urban households headed by blue-collar or white-collar workers, or the inter-professional minimum growth wage).
The parties are also free to decide how often to review the life annuity.
If the contract does not provide for indexation, each year the Finance Act issues a table of increase coefficients to be applied depending on the date of the contract.